223 investors have been ordered to return money they withdrew, even if they posted a net loss

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Under New York state law, court trustees can seek recovery of withdrawals for up to six years.

The court-appointed trustee unraveling Bernard Madoff's Ponzi scheme is threatening legal action to recover $735 million from investors who unwittingly made money off the swindle.

For decades, Madoff paid steady profits to his clients, telling them the money came from the stock market.

But the gains were fictitious. Madoff pleaded guilty last month to stealing from some investors to pay bogus profits to others.

Trustee Irving Picard has sent letters to 223 investors, ordering them to return money they withdrew before the scheme collapsed. He wants the money to be divided evenly among all victims.

Bernard Madoff & His Victims

Lawyers representing some of those investors expressed dismay over the letters and said they would challenge their legality.

The requests had been expected following Madoff's guilty plea last month to operating a long-running financial scam that involved nearly $65 billion in clients' account records.

Under New York state law, court trustees can seek recovery of withdrawals for up to six years, an effort known as a clawback procedure. The legal theory behind the effort is that the withdrawals were paid from a financial scam, so should be returned and proportionately redistributed to all victimized investors.

Analysts say the requests raise the prospect of inflicting new financial damage on investors — including some who lost substantial sums to Madoff despite their withdrawals.

"It's absolutely horrendous that they're going after people like this," said Ronnie Sue Ambrosino, a victim who estimates that she and her husband, Dominic, lost more than $1.6 million to Madoff. "Where do they think the victims are going to get the money from? It's crazy."

Picard's office did not immediately respond to a message seeking comment on the requests.

However, similar clawback procedures in other financial scams have proved successful.

In a 2005 case involving Bayou Management, a hedge fund that collapsed from a multiyear fraud, a trustee recovered millions of dollars by waging dozens of clawback lawsuits.

Victor Stewart, a Lovell Stewart Halebian partner whose law firm represents clients suing a feeder fund that channeled their money to Madoff, said investors could argue it's inequitable to force repayments by those who withdrew money in good faith with no knowledge that it came from a scam.

"Given the size of the Madoff case, it's going to make what happened with Bayou look pretty tame," said Stewart. "It's going to get very ugly."